Elliott Waves market on, for now

PeterBrimelow

NEW YORK (MarketWatch) -- A bearish stopped clock twitched and caught March's major move. Now it's twitching again -- both ways.

"Elliott Wave predicts bear-market rally?" was the headline when I last wrote about Robert Prechter and his Elliott Wave empire, his own philosophical Elliot Wave Theorist, and its sister letter, the portfolio-oriented Elliott Wave Financial Forecast, edited by Steve Hochberg and Pete Kendall. (See March 4 column)

It did. And it was right.

As I noted then, Prechter's extremely esoteric wave theory had not always led him to bearish conclusions. Rather the reverse. But a whole stock market generation forgot this during the late lamented bull market, in which Prechter and his people never believed, and which made them extremely unpopular. To these innocents, it was a surprise that the Elliott theory was ever bullish.

For the record, however, over the past 12 months the Elliott Wave Financial Forecaster is up 22.8% by Hulbert Financial Digest count, vs. negative 43.32% for the dividend-reinvested Dow Jones Wilshire 5000.

And so terrible has the damage to the stock market been that the HFD now shows EWFF ahead over the past 10 years, with a annualized gain of 1.7% vs. negative 2.55% annualized for the total return DJ-W.

In the short run, the Elliott Wave is apparently still positive on stocks. In recent alerts, EWFF has written:

"The implication of this structure is that the stock market will rally for several months, as prices work higher to complete an upward correction of Primary degree ... a longer-term push-back to 10,000 is now unfolding."

And it has warned: "Traders need to orient themselves towards upwards surprises."

Most recently, EWWF seemed to be gaining in confidence. It wrote, in its native Elliott-speak:

"Any short-term pullback should encounter support in the 765-776 range [on the S&P 500 Index.
SPX, +0.59%
], which includes the previous upper channel line, and lead to another rally leg that carries prices higher for several weeks, at the least. The only thing that might derail this picture is a deep drop back ..."

The problem is Robert Prechter's Elliott Wave Theorist, which is much more general and long term.

Long term, it's snarlingly bearish. Prechter wrote recently:

"Those calling for either the stock market or oil to resume its new bull market are ignoring evidence from Elliott wave channels that a bull market of Supercycle degree is over. Although most people believe that the Fed and the government possess unlimited inflationary power, which would drive both of these markets to the stratosphere, I prefer to heed the lessons from wave forms ... "

He went on ominously: "This quarter is the 9-year anniversary of the peak of wave V [an Elliott concept] in the Dow Jones Industrial Average
DJIA, +0.72%
So, based on our projections, the bear market is more than halfway done in time. It is less than halfway done in price, however, as the steepest portions of the decline lie ahead."

The steepest portions of the declines (gulp) ... lie ahead?

To give some idea of the devastating deflationary downdraft that Prechter is anticipating: he says elsewhere that "when these markets break below the lower lines of their respective channels -- currently around $20/ barrel in crude oil and at 3000-4000 in the DJIA -- they might rally enough to meet those lines again. But they will not penetrate them on the upside."

One paradoxical feature: Prechter also argues that Treasury bonds are "building a historic top." "T-bond prices have been going up for 28 years, since 1981, when the rate of inflation peaked," he writes.

He continues: "Although it has made sense for Treasury bonds to fall in yield in the initial phase of this deflationary period, record spending by the government in recent months along with sentiment readings reflecting extreme optimism toward T-bonds suggest higher interest rates ahead, no matter what the Fed does."

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